Market Quick Take - March 18, 2020

Macro 3 minutes to read

Steen Jakobsen

Chief Investment Officer

Summary:  Markets staged a solid rally yesterday in the US as the Fed policy response to the unfolding crisis has reached a furious pace as another half-trillion USD repo was announced together with the restart of a 2008-era commercial paper purchase facility. The Trump administration was out floating a large stimulus package of USD 1.2 trillion. Overnight, equities erased more than half of yesterday's gains.


What is our trading focus?

  • The stock markets…
  • 10YBTPJUN20 (Italian 10-year government bonds) – with Germans warming up to joint debt issuance in Europe there will most likely be focus on European government bonds
  • USDJPY – USD strength continues due to USD funding issues and safe-haven dynamics
  • Long volatility (VOOL:xetr) – VIX futures term structure continue to signal stress and tailwind for long volatility positions with the spot at 76 and the May VIX futures contract at 53.
  • ETF on 20+ US Treasuries (TLT:xnas) – Helicopter money is driving long rates higher with the biggest move in US 30-year yield yesterday since 1982.
  • Delta Air Lines (DAL:xnys), Deutsche Lufthansa (LHA:xetr) – potential bailouts in the US and Europe combined with the EU’s decision to close its external borders will move this industry.
  • HG Copper (HGK0) drops to 2016 low as it becomes the commodity hedge against global recession, but virus outbreak likely to cut production while fiscal spending could trigger a pickup in demand. 

What is going on?

S&P 500 (cash index) rallied 6% as the Trump administration moved closer to “helicopter money” by promising “checks” to Americans within two weeks and a total package of stimulus of as much as $1.2trn (5-6% of US GDP). Read Christopher Dembik’s research note It’s time for free money for background. The idea immediately moved US 30Y yields higher ending the session 40 bps higher at 1.69% - the biggest selloff in T-bonds since 1982. US 10Y/2Y yield also climbed to 45 bps extending the steepening that started early last week.

Overnight, US equity futures slumped limit down (-5% from the close of the cash index)

US 10-year breakeven rates are breaking down to 0.69% from 1.78% in the beginning. These are the lowest levels since the Great Financial Crisis in 2008.

UK Chancellor Rishi Sunak has announced a £330bn emergency rescue package for UK business, saying the UK government will do “whatever it takes” to protect companies and incomes on a huge scale.

Link: USD funding article

Angela Merkel says she is open to consider joint debt issuance in Europe as proposed by the Italian PM Giuseppe Conte. This would be a transformational step in the European Union and something that has longed been proposed to strengthen the euro area. The Dutch PM Mark Rutte expressed more concerns regarding joint debt issuance. Spain announced up to EUR 200 billion in support to economy

The Fed is restarting a commercial paper (CP) programme with parallels to the 2008 crisis as CP yields have soared highlighting recent monetary policy moves inadequate to address real funding issues for companies rolling daily credit lines in the commercial paper market. Another facility for primary dealers versus

The VIX closed at 76 with the VIX futures contract expiring in May (2nd contract) rising during the session as long volatility continues to pay off with the VIX futures term structure in backwardation.

ZEW Survey Expectations for March plunged from 8.7 in February to -49.5 in March compared to -30 expected reaching levels not seen since late 2011 during the height of the euro crisis. The levels have historically been consistent with negative GDP growth q/q.

The EU is closing its external borders for 30 days for all non-Europeans. This will obviously increase the economic damage to the airline, leisure and tourism industries.

IATA says that airline industry will need $200bn to survive the current demand shock and that most major carriers will run out of cash within two months.

Our ‘Bounce back basket’ is down 11% since March 9 with the two biggest decliners being ConocoPhillips as oil prices continue to be under pressure and CTS Eventim operating an online booking system for tickets to events.


What we are watching next?

USDJPY – does it hold the 108.00 line? This is a key technical area for the currency pair and Japan is heading into the final two weeks of its financial year (end Mar 31), with several past examples of major trend changes in the March/April time frame for USDJPY. We are also watching EURUSD, USDCAD and AUDUSD as the USD continues to strengthen.

Gold putting up a strong fight against the latest collapse in forward inflation expectations. As a result the 10-year real-yield (a key guide for gold) has jumped from -0.55% on March 6 to the current +0.31%. We question these inflation expectations and maintain a positive outlook.

Bonds – At this point, the spike in long yields can be called volatility, but another day like yesterday could bring forward yield-curve-control

Calendar (times GMT)

  • 1230 – US Housing Starts (Feb) – again too early to show COVID-19 impact
  • US FOMC Meeting (cancelled)

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